Mortgage rates and inflation may draw the Fed’s attention this election

Mortgage rates and inflation may draw the Fed's attention this election


This year is going to be a big year for Federal Reserve officials: They are expected to cut interest rates several times as inflation continues to decline, allowing them to scale back a two-year-long effort to cool the economy. Will get a chance.

But 2024 is also an election year – and the expected change in the Fed’s stance could thrust it into the political spotlight as the campaign season begins.

By changing the cost of borrowing money, the Fed’s decisions help increase the strength of the US economy. The central bank is independent from the White House – meaning the administration has no control or input over Fed policy. This construct exists specifically so that the Fed can use its powerful tools to secure long-term economic stability, regardless of whether its policies help or harm those running for office. Fed officials fiercely guard that autonomy and insist that politics has no influence on their decisions.

That doesn’t stop politicians from talking about the Fed. In fact, Recent Comments from Major Candidates Suggests that central banks are likely to be a hot topic in November.

Former President Donald J. Trump, the front-runner for the Republican nomination, has spent his tenure as president forcing the Fed to lower interest rates and in recent months, he has argued in interviews and at rallies Mortgage rates – which are closely tied to Fed policy – ​​are very high. This is a talking point that could work well at a time when housing affordability continues to challenge many American families.

Still, Mr. Trump’s history suggests that if the Fed did start lowering rates, he might take the opposite step: He spent the 2016 election He criticized the Fed for keeping interest rates low, which he said was benefiting incumbent Democrats.

President Biden has avoided talking about the Fed out of respect for the independence of the institution to which he referred. But he has indicated he would prefer that rates not continue to rise: he called recently Positive but moderate jobs report a “sweet situation” that was “necessary for stable growth and low inflation, not just to encourage the Fed to raise interest rates.”

The White House did not provide on-the-record comment.

Such comments reflect a reality that political polling makes clear: High prices and steep mortgage rates are weighing on economic sentiment and disconcerting voters, even though inflation is now slowing and the job market is surprisingly healthy. Has remained strong since. As Fed-related issues resonate among Americans, the central bank is likely to remain in the headlines.

“The economy is certainly going to matter,” said Mark Spindell, chief investment officer at Potomac River Capital and co-author of a book about the Fed’s politics.

Fed policymakers raised interest rates from near zero to between 5.25 and 5.5 percent between early 2022 and summer 2023, the highest in 22 years. Those changes were intended to slow economic growth, which would help curb rapid inflation.

But now, pricing pressures are easing, and Fed officials may soon begin debating when and how much they might cut rates. Policymakers last month estimated they could cut borrowing costs three times this year about 4.6 percentAnd investors think rates could fall even further about 3.9 percent by the end of the year.

Executives are also shrinking their large balance sheets of bond holdings from 2022 – A process that could cause long-term interest rates to rise at the margin, causing some deceleration in market and economic growth. But officials have indicated in recent minutes that they may soon discuss when to move away from that process.

Already, the mortgage costs to which Mr. Trump is referring have begun to decline as investors expect lower rates: 30-year rates peaked at 7.8 percent in late October, and are now slightly above 6.5 percent,

While the Fed can explain its ongoing changes based on economics—inflation has declined sharply, and the Fed wants to avoid overdoing it and causing a recession—it is important for central bankers to change policy at a critical political juncture. Can leave to adjust.

Former and current Fed officials insist the election won’t really matter. Policymakers try to ignore politics when making interest rate decisions, and the Fed has changed rates in other recent election years, including at the start of the pandemic in 2020.

“I don’t think politics enters into the debate much at the Fed,” said James Bullard, who until last year was president of the Federal Reserve Bank of St. Louis. “The Fed reacts the same way in election years as it does in non-election years.”

But some on Wall Street think cutting interest rates just before the election could put the central bank in an alternative difficult position – especially if the move comes too close to November.

“This will become increasingly inconvenient,” said Laura Rosner-Warburton, senior economist and founding partner of economic research firm Macropolicy Perspectives. Many analysts said an early rate cut could help in those aspects.

And Mr Spindell predicted that Mr Trump could continue to talk about the Fed during the campaign – potentially exacerbating any discomfort.

Since the early 1990s, presidential administrations have generally avoided talking about Fed policy. But Mr. Trump maintained that tradition both as a candidate and again when he was in office, regularly harassing Fed Chairman Jerome H. Powell on social media and in interviews. He called Fed officials “obstinate” and Mr. Powell “the enemy.”

Mr Trump appointed Janet L. Mr. Powell was nominated to replace Yellen, but it didn’t take long for his choice to sour. Mr Biden re-nominated Mr Powell for a second term. Mr Trump has already said He will not reappoint Mr. Powell as Fed Chairman if re-elected.

Of course, this would not be the first time the Fed has adjusted policy against a politically fraught backdrop. There was concern among some economists that rate cuts in 2019, when the Trump administration was pushing for them, would look like a capitulation. Central bankers lowered rates that year anyway.

“We never take into account political considerations,” Mr Powell then said, “We don’t even adopt monetary policy to prove our independence.”

Economists said the trick to lowering rates in an election year would be clear communication: By explaining what they are doing and why, central bankers may be able to allay concerns that any decision on whether or not to move will Politically motivated.

“The key is to keep it legible and legitimate,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist. “Why are they doing what they’re doing?”



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